China’s central bank protests too much. Beijing is wary of overdoing its efforts to shore up the troubled financial system and faltering economy, but continues to be pushed into rolling out new measures. Fresh steps are announced almost daily, though many are modest in scope. China faces at least another year of lackluster expansion, and global growth will endure significant challenges if the tyranny of incrementalism continues. There are few grounds for optimism.
The latest initiatives from the People’s Bank of China point to deepening concerns. Investors were surprised by cuts in official interest rates last week, though the size of the adjustment was meagre by world standards. State firms are being pushed to extend more credit and $29.3 billion in special loans will be offered to ensure property projects are delivered to buyers. The yuan is near its weakest in two years and down more than 5% against the dollar over the last 12 months; officials likely see some depreciation as a way to bolster exports, provided the currency’s retreat isn’t dramatic. On Wednesday, China’s cabinet outlined a 19-point package to keep the economy afloat. That sounds impressive, though the details were less encouraging. The commitment of a further 1 trillion yuan ($146 billion) in funding, largely focused on infrastructure, won’t pack an enormous punch.
It’s safe to assume more developments are in the works. A PBOC-backed newspaper last week endorsed additional support in a front page story. No wonder economists project further rate cuts and additional steps to put a floor under the decelerating expansion — assuming there’s still one to protect. Leaders look like they are constantly playing catch-up. Objectives appear to in competition: No sooner are plans to shore up growth announced than officials remind us they are loath to embark on large-scale juicing of the economy.
Premier Li Keqiang has resisted a massive rescue, saying last month he won’t “overdraw the future.” The caution reflects bitter experience. China unleashed an enormous stimulus during the US subprime crisis. That helped the world weather a grave downturn, but produced a big debt overhang for banks and government-preferred companies. China’s economy is now in a vastly different place, however. It was already gliding toward low single-digit growth before Covid flared in early 2020 — that’s compared to the period after China’s ascension to the World Trade Organization in 2001, when gross domestic product surged by more than 10% a year. Is Beijing’s policy wedded to past trauma rather than the demands of the present?
Today, activity is sagging again after an initially strong rebound from a contraction early in the pandemic. There’s little doubt the state will do more. The argument is about the scale, effectiveness — and communication. The difficulty articulating a clear path is compounded by the collar that Covid-zero has around business and social life. It’s hard to make projections when you don’t know how many major cities are going to be shut down and when. That means tough times for forward guidance.
Authorities can’t just throw up their hands. The PBOC needs to try harder not to trip over itself. Before the latest rate reductions, the bank was striking an almost hawkish note. Governor Yi Gang is right to keep an eye on inflation, but it’s only a fraction of the level endured by other major economies. “China is ratcheting up monetary stimulus in baby steps,” according to Eric Zhu of Bloomberg Economics. “With traditional tools failing to gain traction, a bigger policy shift will be needed to get growth back on track.”
While departing from gradualism needs the nod from Communist Party brass, Yi is far from hamstrung. Because big parts of the economy are tied to the state, any measures the PBOC does take can flow through targeted sectors. “We view the central government’s introduction of bailout funding as the first meaningfully positive development in the past five to six weeks,” Jizhou Dong and Stella Guo, analysts at Nomura Holdings Inc., wrote in a note Sunday.
How long until PBOC folks start mouthing a version of former European Central Bank President Mario Draghi’s “whatever it takes?” At present, they sound more like ex-Federal Reserve chief Ben Bernanke and past Treasury Secretary Hank Paulson when they insisted the American housing meltdown would be “contained” and probably wouldn’t sink the broader US economy, let alone world finance. Draghi, too, didn’t get there overnight; the ECB had its share of fumbled half-measures.
Chinese policy makers still have a journey to make. May they get there soon.
Bloomberg
